There are many ways to invest in the stock market, but one of most prominent debates centers on value stocks vs. growth stocks. The former camp attempts to discover assets that are selling at a discount to their intrinsic values, patiently waiting for the discrepancy to close and attain a profit. The latter group seeks only assets, often selling at expensive multiples, that are exhibiting tremendous sales growth.
Growth stocks have generally been under pressure as a result of rising interest rates, but Crocs (CROX 1.47%) is one such business that looks extremely attractive right now. It's my top growth stock to buy in 2022.
Another strong quarter
During the three-month period that ended June 30, Crocs increased sales 50.5% year over year to $964.6 million. Excluding the acquisition of HeyDude, Crocs' core brand saw revenue jump 14.3%, still impressive given the tough macroeconomic environment. And according to CEO Andrew Rees, "HeyDude continues to outperform our expectations and we now expect nearly $1 billion in pro forma revenues this year."
What made Crocs a special business in recent years was its outstanding profitability. From 2017 to 2021, the company's operating margin expanded sharply, from 2.1% to 29.5%. And even with headwinds like the strong U.S. dollar (making revenue earned overseas worth less when repatriated) and higher logistics costs, the operating margin in the most recent quarter was still 29.3%.
But $501.5 million was tied up in inventory as of June 30. This equates to roughly 11% of Crocs' entire market capitalizatoin. Of course, this problem is isn't specific to Crocs' business. Many other retailers are facing the same consequences of a glut in inventory after stockpiling earlier in the year. Luckily, Crocs is still growing the top line at a fast clip, a sign that demand remains very strong.
Crocs is poised for long-term growth
On the earnings call, the management team lowered financial guidance for the current year, now expecting sales to rise between 10% and 13% for the core Crocs brand, compared to a forecast of more than 20% in the prior three months. And the adjusted operating margin is projected to be 26.5% (at the midpoint) for the full year, compressing slightly from Q2 because of integration costs related to the purchase of HeyDude.
Despite the difficult environment the business may have to navigate in the second half of 2022, the longer-term outlook is still impressive. By 2026, executives expect yearly sales to exceed $6 billion and free cash flow to be at least $1 billion annually. Goals that management will pursue include investing in expanding digital penetration, quadrupling sales of sandals, and focusing intensely on generating 25% of revenue from Asia, with a particular emphasis on China, the world's second-biggest footwear market.
It's not difficult to see that if Crocs comes anywhere close to reaching these financial targets within the next few years, the stock is ready to continue outperforming. Over the past five years, shares have soared more than 700%, crushing the broader market's return.
Looking at the valuation
Although Crocs' shares have jumped 42% over the past month, they still trade for an incredibly attractive price-to-earnings ratio of under 9. Not only is this significantly cheaper than Crocs' trailing three-year valuation, but it is also much lower than industry heavyweights Nike, Adidas, and Under Armour.
Owning shares in Crocs is certainly not without its risks, particularly as it relates to the potential for declining demand in the near term amid the record inflationary macro backdrop. But if investors can zoom out and keep their eyes on the next several years, the stock's valuation today looks like an absolute steal given the massive growth management is expecting. And this is why it's a top growth stock to buy this year.
